But the move to include more non-GAAP metrics is also being driven by a need of both investors and corporate managers to focus on measures that have less noise and are clear drivers of the future direction of the business, Professor Paul Bahnson of Boise State University and Professor Paul Miller of University of Colorado at Colorado Springs argued at an Institute of Management Accountants conference in New Orleans this week.

Here are four reasons why the professors said more companies are moving toward taking a Do-It-Yourself approach to financial reporting metrics that are not required by accounting rules:

Disconnect Between Needs of Companies and Investors. “There’s a disconnect between what finance departments want to report and financial statement users want to receive,” Dr. Bahnson said at the conference. Corporate managers may be preferring to report smoother results with less volatility based on readily available historical information, but investors and other financial statement users want to make sure they are seeing more current information and capturing natural volatility that is present in the economics of a business, Dr. Bahnson said.

Historical Cost Information Is Losing Its Relevance. Historical costs “do not provide useful information because they don’t tell you anything about the present,” Dr. Miller said at the conference. While financial reporting has moved more toward real-time measures reported at fair-values over the past decade, investors are still demanding more information about the present values of corporate assets. Dr. Miller urged accountants at the conference to think about historical costs as “unverifiable” and “unreliable” since they are statistically based on a sample size of a single transaction and cannot capture the full market value of an asset.

Some GAAP Metrics Are Particularly Noisy. The process to change accounting rules is political and takes time, so some areas of accounting under Generally Accepted Accounting Principles haven’t been updated in years, such as accounting for research and development or accounting for stock held in the corporate treasury. Accounting metrics may not be that useful internally because accounting rules often rely on underlying assumptions that obscure the incremental cost information managers need to make decisions, Dr. Bahnson said. When accounting rule makers required more present-value ways of accounting for pensions “we saw changes in the way that pension plans are managed,” Dr. Bahnson added. If companies and investors don’t see value in some GAAP metrics, “the solution is to provide more information, better information designed to reduce uncertainty and risk,” Dr. Miller said.

Non-GAAP Metrics May Reduce Cost of Capital. Since investors are seeking more transparency into the business, companies reporting metrics they think give investors a more relevant picture of the business could be reducing their company’s cost of capital. “If you could save yourself a couple basis points on your cost of capital, you could spend a huge amount of money on financial reporting,” Dr. Bahnson said. Companies could improve their data and metrics if it contributes to reduced cost of capital, he said.

The economists seem to believe that accountants should be registered fortune tellers again!! Not sure this is what Pachioli had in mind when he invented double entry book-keeping. Why not just ask management to give you access to their unadjusted trial balance via Oracle or SAP?

I was disappointed with this article. To say that financial departments are reporting what they want to report ignores the fact they are compliant with SEC reporting requirements. I struggle with Dr. Bahnson and Dr. Miller putting forth arguments with no practical solution or implications of their proposals. It may have been more constructive putting forth a case study for review and comment. I do agree that companies are increasingly utilizing measures they feel are more representative of their business. That information appropriately belongs in the MD&A section of the annual reports. With the totality of information provided investors and creditors have substantive information to make informed business decisions considering their tolerance of risk.

9:47 pm June 26, 2013

Ed Jenkins wrote:

Many years ago, John Naisbitt wrote the book Megatrends 2000. Inf I recall the book correctly, Naisbitt posited the real skill in the Information Age would be how to manage and make use of information since technology would make oodles of data available. How prescient! The CPA as auditor, tax professional and business adviser is struggling with what's the right information and measurement to report to make business information relevant and useful, (without getting sued). That challenge will only get more difficult as the triple bottom line of reporting becomes more mainstream and the SASB finalizes a broader measurement system.

Real estate industry veteran Diane Morefield, EVP and CFO of Strategic Hotels & Resorts, Inc., discusses the challenges she has undertaken throughout her career in both finance and operational roles and her management style. While viewing herself as a “conservative voice” in an industry known for risk-taking, she says it's important to take risks when it comes to building one's career.